Fact based news and social commentary that is commercial free and independent.
“Either write something worth reading or do something worth writing.” ― Ben Franklin

Sunday, July 15, 2012

A Challenge to Grover Norquist's "Cost of Government Day" Report

By Brian T. Lynch

Every year the Americans for Tax Reform, Grover Norquist’s group, publishes a report called “Cost of Government Day”. And every year average citizens hear some colleague at work tell them how many days they have to work before the money they make is theirs own. It's often called “tax freedom day” .

The 2012 report has been released and, if it is to be believed, the average American will have to work until July 15, over 53% of the year, before all government taxes are paid. What’s more, this unexamined analysis is widely echoed on the internet and reported as fact in the main stream media. Here is how the report describes its components:

Federal
SpendingThe average
American worker will have to labor 88 days just to pay for federal spending,
which consumes 24.04 percent of the national income. This is a small
improvement from last year, when individuals had to work 91 days, and the
previous year, when taxpayers worked 93 days.

State
and Local SpendingIn 2012,
the average American labored 40.04 days to fund state and local spending. This
is roughly the same as the number of days worked in 2011; but it is one day
more than 2010.

Regulatory
CostsThe average
American must labor 69 days in 2012 just to cover the costs of government
regulations. In 2010 and 2011, laborers had to work 71 days to cover the same
costs. 2012 regulations consume about 19 percent of gross domestic product. In
2001, regulations consumed 14 percent of gross domestic product; the gap
between 2002 and 2012 represents the largest increase of regulatory burdens
yet.

What you should know about this is that Norqueist is highly partisan and this is a well crafted partisan document. Reasonable people should therefore ask themselves whether the findings are true for them. If you do, the findings probably don't match reality. A cursory look at the findings reveals that the analysis makes assumptions that stretch credulity. Below are just a few quick points. Hopefully others with better credentials will consider this post and conduct a more rigorous critique.

First, it appears this analysis is based on federal spending, including deficit spending. Deficit spend is a cost borne in the future, not now. It has no bearing on how long you must work this year to pay what you owned in taxes this year. You don't pay off what you have borrowed all at once. Government Expenditures including deficits should not be used to calculate when the average person has paid off the current years taxes.

A better basis for calculating current federal wage based tax burdens relative to earnings income (which this analysis exploits) is the actual individual income tax and payroll tax that a person must pay. These tax rates most determine when your federal tax burden on earnings has been met. Of course you also continue to pay federal taxes on the purchase of cigarettes, gasoline and perhaps other items, but these ad-valorum taxes are relatively minor.

Secondly, The Norquist report uses the statistical average to express the tax burden. This is the wrong statistical measure. If this were reasonable we would use the average instead of the the median to describe middle class income. We don’t use the average because wealth distribution, like tax rates, is a skewed distribution. Consider how the average income of patrons in your favorite restaurant would jump if Bill Gates walked through the door. Now consider how long you would have to work to pay an average share of the tax burden in the restaurant when Bill Gates is in the room. We don’t use averages for describing US income and we shouldn’t use it for assessing tax burdens.

Next, Norquist and company in his average individual taxes burden all taxes paid by businesses and corporations. Perhaps, from Norquist’s perspective, consumers ultimately bare the cost of all business taxes. Most people see it differently and should, especially if corporations are really people under the law. If we do bare the costs of business taxes then we should also reap the benefits of business and corporate profits, which we don't.

Then there is the inclusion of the cost of every government regulation imposed on business. Is this really something to charge against individual tax payers each year? For example, if we make Exxon take steps to assure they don't pollute our ocean while drilling for oil off shore, is the extra they must spend to safely drill for oil a tax, or is it really the cost responsibly doing business? And if regulations save us from more costly consequences, are they an expense or a savings? The whole idea of charging back to consumers the cost of regulations designed to protect them from harm is appalling.

Norquest's report says that federal taxes alone take 88 days for the average person to pay. Let's contrast that with a tax rate methodology to see how it compares.

NUMBER OF DAYS OR WEEKS OF WORK TO
PAY FOR ALL FEDERAL WAGE BASES TAXES

Married Filing Jointly

(adjusted gross income)

Tax Bracket

SS/OASI as of 2011*

Medicare

% of all Fed Tax on
Earned Income %

Work Days in a year

Work Days to Pay Federal Wage Taxes

Weeks to Pay Federal Wage Taxes

Federal Tax Free Weeks

$0 – $17,400

10%

4.20%

1.45%

15.65%

260

41

8.1

43.9

$17,400 – $70,700

15%

4.20%

1.45%

20.65%

260

54

10.7

41.3

$70,700 – $142,700

25%

4.20%

1.45%

30.65%

260

80

15.9

36.1

$142,700 – $217,450

28%

0.00%

1.45%

29.45%

260

77

15.3

36.7

$217,450 – $388,350

33%

0.00%

1.45%

34.45%

260

90

17.9

34.1

Over $388,350

35%

0.00%

1.45%

36.45%

260

95

19.0

33.0

Single (adjusted gross income)

Tax Bracket

SS/OASI as of 2011*

Medicare

% of all Fed Tax on
Earned Income %

Work Days in a year

Work Days to Pay Federal Wage Taxes

Weeks to Pay Federal Wage Taxes

Federal Tax Free Weeks

$0 – $8,700

10%

4.20%

1.45%

15.65%

260

41

8.1

43.9

$8,700 – $35,350

15%

4.20%

1.45%

20.65%

260

54

10.7

41.3

$35,350 – $85,650

25%

4.20%

1.45%

30.65%

260

80

15.9

36.1

$85,650 – $178,650

28%

4.20%

1.45%

33.65%

260

87

17.5

34.5

$178,650 – $388,350

33%

0.00%

1.45%

34.45%

260

90

17.9

34.1

Over $388,350

35%

0.00%

1.45%

36.45%

260

95

19.0

33.0

* Reflects temporary Bush tax cuts set to expire in 2012. Rate would return to 6.20%.

Notice that when tax burdens are broken down according to federal tax brackets, the two lowest brackets, those with people working between 41 and 54 days to pay federal wage based taxes, represent far more than half the working population in America. In fact, they represent around 61% of all wage earners. These folks work far less than the 88 days in the Norquist analysis. On the high end, those making more than $178 thousand end up working longer to pay their federal taxes. This is as it should be under a progressive tax structure, but to average all these groups together is misleading..

Another sign that something is wrong with the Norquist analysis is the way graphics are manipulated to exaggerate the data picture. For example, if you look at the 2012 Cost of Government Day for States graph you will see that the differences between individual states is exaggerated by presenting the graph starting in June rather than January.

Every state has a different state and local tax structure, etc., so verifying Norquist's state and local tax data requires more time and information than can be applied to this post. As there are further developments or additional analyses devoted to this topic you can find update here. Your feedback is welcome. G